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Emerging-Market Debt Attractive Right Now

Pimco says now is the time to buy emerging-market debt, as yields are up after the worst selloff in a decade.

Investors should buy emerging-market (EM) debt after the worst selloff in more than a decade drove up yields, according to the world’s largest bond investor.

“From a fundamental point of view, we see value in the higher yields available on many EM bonds, both in local currency and U.S. dollars,” Ramin Toloui, the co-head of emerging markets at Pacific Investment Management Co. (Pimco), wrote in a note today. “In a global environment characterized by continued concerns about growth—even amid firmer economic indicators—policy interest rates in both developed and emerging countries are poised to stay low.”

The bonds sold off as the U.S. Federal Reserve debated whether to pull back unprecedented monetary stimulus that over the past four years helped bolster demand for assets from developing countries. Investors are also anticipating that some central banks, such as those in Turkey and Brazil, may raise borrowing costs to fend off currency depreciation, driving up bond yields and pushing prices lower.

Yields on Brazil’s real-denominated bonds due in 2023 have increased 1.57 percentage points over the past three months to 11.5 percent, or 8.8 percentage points higher than 10-year U.S. Treasuries, according to data compiled by Bloomberg.

Global Growth

Global economic growth remains slow, so investors should pare bets on higher interest rates, according to Toloui. Improved government balance sheets since the 1990s may also allow most developing countries to keep interest rates low without putting pressure on their currencies, he wrote.

“Buying bonds is all about locking in yields,” wrote Toloui, who is based in Singapore. “If the global growth environment remains weak, it is likely that the interest rate increases priced in most EM local curves will not materialize, making it advantageous for the bond investor to lock in yields now.”

Pimco’s $6.8 billion Emerging Market Bond Fund has lost 7 percent this year, trailing 54 percent of its peers, according to data compiled by Bloomberg. Pimco, based in Newport Beach, California, manages the $262 billion Total Return Fund, the world’s largest bond fund.

Global investors have “very low” allocations in emerging-market bonds, which represent 7 percent of total debt holdings among U.S. mutual funds, according to Pimco. They should take advantage of the recent selloff as “an attractive entry point to build positions toward a long-term strategic target,” Toloui said.

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